The Financial Boom:
Deregulation of the markets Financial innovation ‘ Cheap money ’ in the markets Excessive leverage Massive bonuses Asset prices appreciation (Real estate, sto c ks, commodities, bonds) Global iza tion of the financial system Excessive risk taking and speculation The Financial Boom
The bank that burst the global economy:
The burst of the Real Estate prices bubble The coll a pse of the subrime Market Le h man Brothers filled for Chapter 11 Liquidity crisis Confidence crisis Trouble Asset relief Program Nationalization of Citigroup, Freddie Mac, Fannie May American Insurance Group and General Motors , Royal Bank of Scotland and Northern Rock The bank that burst the global economy
Lehman Brothers Holdings:
History : Financial institution serving investment banking, equity and fixed-income sales, research, trading, investment management, privat e equity and private banking. Henry, Emanuel and Mayer Lehman in 1840 established a trading and dry company specialised in cotton . 1968 Lehman’s in the postwar expansion of trading and bonds. V enture capital led the firm into an undeniable golden age. For almost a 100 years Lehman represented a business aristocracy and a New York corporation which was secretly aspired to emulate from other investment banks. Lehman Brothers Holdings
Reasons behind the collapse:
Subprime boom Subsidiary subprime lenders: Neuberger Berman Inc . , Aurora Loan Services, Inc., SIB Mortgage Corporation adopted risky lending methods Relaxation of lending practices: Ninja and Non-Doc loans became common place across the industry. Lehman via its subprime lenders was obtaining massive portfolio of loans R epackaging and R eselling bundles of subprime- mortgages via their subsidiaries as well as invest on them Reasons behind the collapse
Reasons behind the collapse:
Reasons behind the collapse The Real state Bubble S lash of the interest rates from the Fed Demand for credit derivatives and relaxed mortgage lending practices fueled the bubble High demand for real estate mortages Lehman property investment was near 50 $billion so depreciation of the real estate market led to loss of capital for the bank. CDOs and ABS values were based on housing prices ; as a result they lost their value when the housing bubble burst and the subprime borrowers defaulted
Reasons behind the collapse:
Asset-backed securities (ABS) and Collateral debt obligations(CDOs) Lehman underwrote mortage-backed securities more than any other firm, accumulating an $85-billion portfolio, or four times its shareholders' equity Leverage levels up to 20-35 percent of their equity capital in order to invest on securitized products using debt capital Excessive risk-taking Passing the investment risks through unregulated ‘credit default swaps’ (CDS) where they didn’t have any adequate capital behind them.(AIG case) Weakness of the FED to recognize the economic catastrophe that Lehman Brothers bankruptcy would cause. Reasons behind the collapse